Transcript:

Caroline Woods We’re heading into a gauntlet of tech earnings and a fed decision. And the big question is whether this rally is built on solid ground or just holding its breath. Vince Lorusso is President and CEO and Portfolio Manager at Clough Capital. He joins us now. Vince, thanks so much for being here.

Vincent Lorusso Thanks for having me.

Caroline Woods So set the stage for us here in a week with so much noise, do you just kind of sit on your hands and wait it out? Or is this where the real money is made?

Vincent Lorusso Yeah. I wish we could wait it out sometimes. But as active managers, we’ve chosen to, to go down a path here where we want to be thoughtful about the markets and be, you know, tactical, where we think it’s prudent for our clients. And, you know, I think I would just frame it at a high level. The thing that does keep us a little bit more steady in our positioning is to say, look, we’re bullish on equities overall.

For some reasons I can get into. And then the question becomes, okay, point to point when you have, you know, earnings season or fed announcements, you know, how tactical do we want to be within our portfolios. But you know with that ballast for us that says look at a macro level, I mean we do macro research that says equities are the place to be.

Bonds are not particularly inspiring or exciting right here. You know, everyone’s been kind of patiently waiting for the fed to move. As far as you know, the Bulls would like to see the fed move and we step back and say, look, absent the big fed movements that that folks have maybe anticipated a year ago. That has not precluded equities for from working.

And we think that’s for very good reasons. Demographics and technological innovation and the shortness of money supply. And you know so we do sit back and we can’t quite sit on our hands as you suggested. But we can take a bullish posture. And I think that keeps us kind of steady, you know over some of the volatility and noise.

And then the question is what do we do tactically. Well we’re looking for themes and ideas at the company level that we think offer the most asymmetric risk reward profile. So you know we’re looking to to generate alpha for our clients. And we do that really that’s more of a day to day basis right.

Caroline Woods Okay. So dig into what actually makes you bullish. And then we’ll talk about some of those investment opportunities that you’re finding.

Vincent Lorusso Sure. Yeah I’m happy to do that. And as I go through the framework at Clough Capital, and we’ve been managing money now for 25 years over cycles. And and we really build this framework around saying, you know, what’s our macro perspective. What do we see thematically? One of those kind of multi-year or longer duration opportunities for investors. And then that, you know, what I describe as kind of the GPS, the turn by turn navigation that says, okay, which companies do we own in the portfolio and how much?

If I start with that macro framework, it really begins with demographics. And one of the things that I think is often overlooked in this, you know, kind of narrative about what’s happening with inflation versus growth is in the United States. We are moving into a savings economy. And what that means is demographics are dictating that as baby boomers retire and move to that phase of their of their life and their economic impact.

They go from being big spenders to being savers. And we see that in Europe today. We’ve seen that for more than a decade. We started to see that, you know, even prior to Western Europe, we saw that in Japan. And what happens in those economies is folks move into a position where they’re just not buying as many, you know, automobiles, they’re not buying the furniture and they’re not investing in the housing stock.

The way they did is they were growing their families. And and that effectively puts a lid or it really dampens inflation. So if you step back as an equity investment, you say what’s going on as an economy when we’re saving more than we’re spending and the demographic boom is, as we all know, is is really dictated by the baby boomers.

It has been for so many decades. And you really need to pay close attention to where they are and where they are now is moving into retirement and saving. And that’s actually really bullish for equities because it does put that that kind of lid on inflation that I was referring to the other dynamic, which does get a lot more narrative.

I’ll confess in the in the capital markets, these days, is is what is the impact of technological innovation. And what we see is increased productivity. Now, whether that’s kind of the continuation of a long trend of technological innovation driving productivity, it’s actually been in place for decades. But maybe that’s inflecting higher right here on the basis of AI and some of the implications of that as it relates to the workforce and productivity.

And that’s another kind of dampener on inflation. So you start to put those things together and you have an environment as an equity investor where you say, look, we’re going to be moving probably into a direction where the fed can become more accommodative. Money supply and fed balance sheets, you know, notwithstanding, we think that the place to be is equities.

And that’s kind of the bullish framework that really starts us down. You know, if I go from the kind of the progression here of saying where does our compass point. The compass says we want to be bullish on equities here. And you see that in our in our strategies as active managers are where we have a short book.

We’re leaning towards a higher net exposure. So a smaller short book and a bigger long book. And then that next framework, if we go from the compass to sort of like what I described as the telescope, you know, I say, all right, what do we see going on in the next couple of years? Where are those areas of investment, technological innovation, the impact of building out so many data centers and the CapEx around, you know, building out the AI infrastructure?

We think those are interesting areas. That has obviously implications for energy. So, so kind of narrowing down is they are bullish on equities. We really like technology for a lot of the reasons the folks are aware of, we’re playing that through not just the obvious kind of semiconductor chip and build out of the of the compute capability.

But we’re actually playing it through the infrastructure and the energy needs. And then we go a little further. Right. What are the specific companies we we want to own for our clients? But that really kind of frames that hopefully the bullish perspective that we’ve had now, clough capital for, for candidly for quite some time, but we continue to see that is a driving dynamic for equity investors right here, almost independent of what the fed does this week or in a couple of months.

You know, a lot of people will fixate on trying to predict exactly when the fed is going to move and by how much. And, you know, we think that’s there’s kind of good news and bad news. The kind of is entails, that type of analysis entails, you know, the bad news is it’s really hard to do that.

I mean, it’s just hard to look out more than a year and try to predict with certainty the timing and magnitude of fed moves. But the good news is it doesn’t really seem to matter as much right here. I mean, what the what the capital markets are telling us is that rates are coming down and equities are the place to be.

Caroline Woods Although the fed is widely expected to leave rates on hold basically until June. If you take a look at the CME fed watch to also, might not be coming down us any more for a little bit, but I’m curious for someone who runs both a long only and a long short book, is it time to say aggressive at this point, knowing that you’re bullish on equities, or are you looking for protection, knowing that there’s certainly a lot of obstacles that could get in the way, given the fact that the S&P is also at all time highs?

Vincent Lorusso Yeah. So those are great points. And I’d say it’s a little bit of both. Almost always right. We’re always thinking about what’s our downside risk and how can we prevent again some some downside draws in the portfolios. And we’re thinking about things like standard deviation. And you know we do want to maximize our return per unit of risk.

Right. So we can’t just be, you know kind of all in aggressively long high beta stocks and, you know, growth and innovation. And that’s just not our style of capital. We do run fundamental analysis. We’re thinking about valuation frameworks and risk reward. And I’d say we’re maybe a deviates a little bit as I say as you alluded to.

So we have a long only fund CBS. It’s fully invested. It’s fairly high conviction. Right. It’s only about 30 to 40 stocks. And and there the question is not so much what do you want your net exposure to be. It’s which securities do you want to own to get to that. You know close to 100% net exposure.

And I think in that instance, what we’re doing is balancing the fundamental work that we do with the valuation analysis. And we’re saying within the portfolio, we definitely want exposure to kind of some of the smaller cap growth type names, where innovation is is taking hold. We don’t mind having exposure across sectors and geographies and market caps.

But how do you balance that from a risk reward framework is one you do the deep analysis right. You follow these companies closely and you think about, you know, position sizing, but you also want to own some of them or are stable defensive names in the portfolio. You know, companies that have maybe a wide moat in terms of their free cash flow generation or backlog, they have healthy balance sheets.

They’ve got, you know, management teams that have a long and demonstrated track record of of managing profitability across cycles. So I sometimes think when folks look at KBS in particular, that’s the long only. And we post all of our holdings every day on our website so folks can see what we own. As of that day’s closing price, what you’ll see is kind of an eclectic mix of, you know, familiar companies that people have come to know, and maybe they use them as consumers and they’re just, you know, very, you know, kind of prominent throughout the capital markets, maybe larger cap.

And then there’s about a third that people are somewhat familiar with. And I tend to see my conversations about the portfolio, maybe a third, that people say, you know, where do you find that? I mean, it’s kind of just smaller off the past. Not as well followed. You know, my my response is, look, we have a, you know, we’re we try to be pretty intellectually honest about going wherever the opportunities take us.

So, you know, if the capital markets say we can invest in, you know, as many as 4000 different securities, and we’re gonna get that down to 40 through our fundamental research and our process, you end up with a fairly eclectic mix of holdings. And to answer your question there, I think what we have is a mix of some of those, you know, higher growth, more innovation type, you know, maybe the at the forefront of technology and AI.

And then we have companies that look like, you know, they can compound value for equity holders over many, many years. And management teams that have demonstrated a track record of doing that. And and we think they offer a bit of a ballast and stability within the portfolio.

Caroline Woods Just quickly, Vince, what are you shorting.

Vincent Lorusso Yeah. So that would be more appropriate within the context of CBLZ so that’s the other active ETF I manage. And it does have a short book. So I kind of think of that as my own dual mandate. Right. Is is what do you want the exposure to be kind of overall kind of thinking about the long book minus the short book lands with a net exposure and we typically frame that between about 30 to 70%.

So net long for sure, but a lot of latitude there to get more defensive at times or more aggressive depending on where we see opportunities. And that short book right now is we’re running about 30%, so maybe 30 to 35%. So running pretty fully invested with the long book. So you’re getting that net exposure in the 60s.

And the shorts for us is a little bit more eclectic. You know, it’s probably not as easy to find kind of thematic shorts. I mean, we really want to go in and do the company specific analysis that is taking us to some of the consumer staples. You know, I think staples are a bit out of favor here. The economy’s growing and equities are kind of, you know, performing well.

You typically don’t want to have the lower beta names where they might be getting impacted by commodity pressures and a slowing consumer. If you look specifically within kind of that k-shaped economy, dynamic consumer staples are under a little bit of margin pressure. Always a competitive space. Yeah. So we do have some consumer staples shorts I would say the other one that’s a little bit more popular these days is the software shorts.

You know thinking about all right. Where is technology. Really having an impact on innovation and productivity. There are obviously going to be a lot of gainers or winners from that side of the equation, but it’s hard not to look at who might be getting displaced. You know, the software services names, where, you know, maybe in prior, you know, parts of the market cycle, you would see pricing power scaling users.

Well, it almost seems inevitable to us. And I think the market is saying when you unleash this kind of, you know, a new set of tools and capabilities within AI, some of the consumption patterns around, you know, software specific, very niche type of offerings. Now, they might be under a lot of pressure. So we do we do have a short book.

And again, we we disposables all these every day as well. So folks can see our a long book in our short book. And you’ll see a mix of names for sure, but you’ll see some consumer staples names in some of those software services names that we think are under a lot of pressure.

Caroline Woods Okay. And just finally and we have to make this pretty quick just for the sake of time, I’m curious because obviously I hear about technological innovation as a reason to be bullish in the overall stock market. I don’t hear the the boomer thesis all that much. So what areas of the market stand to benefit if boomers are actually saving more and putting us in the savings economy?

Vincent Lorusso Yeah, I think it’s a broad based impact. It’s more of a macro driver. I mean, you get to that size of a population shifting their consumption habits. You start to think initially, right. What does this mean for the macro. You know, perspective. And I think for us that means lower inflation. You can certainly look to see where boomers are spending money.

And that happens to be some of the travel and leisure names. So we’ve had a long kind of history of the firm of liking the cruise lines. For that reason. People move into retirement and and they stop spending in aggregate, but there are certain pockets of the economy that they will spend. Now, if you look at travel and leisure as a percentage of the economy, it’s just not that large.

So it’s not gonna be enough spending to offset the decrease in capital expenditures for things like appliances and cars and furniture and homes. So I think that’s an interesting way to play the economy. But but really, what you see with technological innovation and productivity is we need data centers. And that is not just semiconductor chips, right? It’s civil engineering, it’s turbines, it’s energy sources.

And we have a lot of exposure to those names within the portfolios today.

Caroline Woods Okay. We’ll leave it there. Vince Lorusso, president and CEO and portfolio manager at Clough Capital, thanks so much.

Vincent Lorusso Thank you. It is a real pleasure.